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Tax avoidance in response to a decline in the funding status of defined benefit pension plans

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  • Chaudhry, Neeru
  • Au Yong, Hue Hwa
  • Veld, Chris
Abstract
We examine the effect of the funding status of defined benefit (DB) pension plans on company tax avoidance behavior. Our results reveal that firms engage more in tax avoidance when the pension deficit, defined as pension liabilities minus pension assets scaled by total assets, increases. We find that for an average pension deficit firm one standard deviation increase in pension deficit is associated with annual tax savings of $3.64million. For 2014 we find that, on the aggregate level, for firms with underfunded DB pension plans a one standard deviation increase in pension deficit is associated with annual tax savings of more than 2.7billion dollars. Our results hold after controlling for factors such as profitability, financial constraints, operating losses, and foreign income.

Suggested Citation

  • Chaudhry, Neeru & Au Yong, Hue Hwa & Veld, Chris, 2017. "Tax avoidance in response to a decline in the funding status of defined benefit pension plans," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 99-116.
    • Handle: RePEc:eee:intfin:v:48:y:2017:i:c:p:99-116
    DOI: 10.1016/j.intfin.2016.12.004
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    Cited by:

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    More about this item

    Keywords

    Tax avoidance; Tax planning; Defined benefit pension plan; Pension deficit; Underfunded pension plan;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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